One woman used her student loan to make a down payment on a car. Another student charged her entire family's new cellphones to her new credit card, at the request of her father. Other students overspent their aid at the beginning of the semester and had to get meals from the local food pantry charity when their college aid dried up by semester's end.
A new study detailing students' financial blunders raises concerns that many undergraduates are jeopardizing their academic success because they haven't first learned how to manage money. The study suggests that for these students to navigate the befuddling financial aid process successfully, they might need to begin with learning financial basics like the difference between needs and wants, the benefits of saving, and the effects of compounding interest.
Susan Eitel, a lecturer in family sciences at Texas Woman's University, says most of the 39 students interviewed at an unnamed public university for her 2007 doctoral dissertation knew they were making unwise and wasteful financial decisions that were harming their educations, but they still did not want to bother learning about finances. Nor were they interested in making short-term sacrifices (such as selling a car or canceling a cellphone) that would raise cash for tuition and give them more free time to study and possibly raise their long-term prospects.
The students, all of whom were dependent on financial aid and were the first in their families to attend college, often focused on their immediate needs and desires, possibly in part because their parents never showed them how to work toward a long-term goal, said Eitel. "They haven't had sound financial behaviors modeled. What they learned were the wrong things," she said.
Eitel found that precious financial aid and paycheck dollars were sometimes diverted from the students' educational needs. One student, for example, spent part of her financial aid on shoes for a sibling. Others worked extra jobs to treat themselves to expensive purses, fancy hairdos, and clubbing sprees.
About half of the students lived on campus and thus could have saved several hundred dollars a month by going without a car. And many spent more than $100 a month on their cellphones. But those expenditures were deemed necessary, Eitel said. Instead, Eitel found the students typically responded to financial stresses by changing other things they felt they could control:
• Working more hours (often cutting into study time)
• Changing majors to something less costly and ambitious. (One student switched from premed to a nursing program because she feared she wouldn't be able to raise enough money to cover medical school.)
• Borrowing more. (They generally took the maximum student loan possible and didn't understand how the bills would hound them after they left school, Eitel said: "The school says, 'I'm going to lend you $5,500,' and they go 'Woo-hoo!' ")
• Scrimping on food.
• Forgoing school supplies such as textbooks.
• Dropping out.
Dropping out, unfortunately, is far too common for low-income students. Research shows fewer than 30 percent of college students from families with incomes below the national median manage to graduate before they are 24 years old. But more than 90 percent of students from families in the top-earning quarter graduate by then and have become qualified for better, higher-paying jobs. The single biggest reason all students give for dropping out: money.
Eitel said helping low-income and financially unsophisticated students won't be easy because of the students' mix of rational and irrational behaviors. How, for example, could advisers persuade students not to spend aid money to help their poverty-stricken families? In addition, Eitel said the students felt justifiably frustrated and helpless when dealing with the mysterious and unrealistic financial aid rules. Some students' parents refused to reveal their earnings and tax information, for example, which makes it nearly impossible to fill out the Free Application for Federal Student Aid and get scholarships or loans. Others called the amount the federal government expected their families to pay for college "crazy" and said they had to take jobs to raise their parents' share.